3P effects of the trust : rules

Question 1

Elements of knowing receipt

Answer 1

(1) disposal of assets in breach of fiduciary duty
(2) beneficial receipt by D of assets which are traceable as representing C’s assets
(3) knowledge on the part of D that the assets he received are traceable to a breach of fiduciary duty

Authority = Hoffmann LJ in El Ajou v Dollar Land Holdings Plc

Question 2

[KR] (1) Disposal of assets in breach of fiduciary duty

Answer 2

Fiduciary duty (here) = duty of due admin of assets

=> issue = whether F acted within scope of their authority when disposing of the property (HMM)

Question 3

[KR] (2) Beneficial receipt of C’s property or its traceable proceeds

Answer 3

• Not enough that D benefited in the abstract sense = overall wealth increased (eg bcs a debt they owed to 3P has been discharged)
• D must have received the property beneficially for himself, not lb if received it ministerially (eg as agent)

Question 4

[KR] (3) Knowledge

Answer 4

• The test = “The recipient’s state of knowledge must be such as to make it unconscionable for him to retain the benefit of the receipt” = BCCI v Akindele
• Knowledge can be acquired at a later date as long as D still has the property when he acquires it = Millet J in Agip (Africa) Ltd v Jackson
• Acc to HMM: D needs to know of facts which made disposal of property a breach of trust, not necessarily that it was a breach of trust

Question 5

Elements of dishonest assistance

Answer 5

(1) a breach of trust or fiduciary duty;
(2) assistance by the defendant in the breach;
(3) a causal link between the breach and a loss to the beneficiaries, or between the breach and a gain to the defendant, depending on the remedy which is sought; and
(4) a dishonest state of mind on the part of the assistant.

= HMM combining the statements in Group Seven Ltd v Notable Services LLP [2019] at [29] and [110]

Question 6

[DA] (4) Dishonesty

Answer 6

test for dishonesty = whether D’s conduct objectively dishonest acc to standards of ordinary decent people

=> no requirement that D subjectively appreciate that what he did was dishonest (// Ivey test)
= Group Seven Ltd v Notable Services LLP (2019)

Question 7

[T] - burdens

Answer 7

• burden is on C to show that whatever he is claiming represents traceable proceeds of his asset : must show evidence of a transactional link = Serious Fraud Office v Lexi Holding Plc
• can be reversed where D under duty to keep accounts, has failed to do so, and the failure causes evidential problems for C trying to establish the transactional link = Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd

Question 8

[T] clean substitutions

Answer 8

look at chronology of transaction – is C trying to trace backwards ?

Question 9

[T] clean substitutions - payment of debt

Answer 9

possible to trace backwards where ‘there is a close causal and transactional link between the incurring of a debt and the use of the funds to discharge it’ – link usually depends on D’s intention

= Federal Republic of Brazil v Durant International Corp

Question 10

[T] clean substitutions - payment of debt

Answer 10

[come back to]

Question 11

[T] mixed substitutions - funds constituted by increasing value of pre-existing rights (A’s ag)

Answer 11

(A) use of A’s money to increase value of B’s pre-existing asset counts as a mixed substitution “only when the process of ‘unmixing’ the value that has gone into that asset does not involve a significant intrusion on B’s autonomy”

Question 12

[T] mixed substitutions - funds constituted by increasing value of pre-existing rights - improvement to land

Answer 12

Re Diplock : D charities spent money mistakenly paid to them out of Te’s estate on phys improvements to their land

=> CA said these weren’t a mixed substitution, rejecting analogy btw use of money to increase value of (title to) land and putting money into bank acc (thereby increasing value of title to the bank acc)

Question 13

[T] mixed substitutions - funds constituted by increasing value of pre-existing rights - Foskett v McKeown

Answer 13

debate abt whether using trust money to pay insurance premiums closer to improvement of existing asset (eg house) = CA’s view or increasing credit in a bank acc = Lord BW in HL

=> Lord BW’s ag : once physical improvement to a thing has been made, cannot be separate from the thing, which is treated as a freestanding asset ≠ mixed fund which can be divided into its constituent parts / pro-rata btw contributors – insurance closer to the latter

Question 14

[T] Mixed substitutions - wrongdoers: ‘Cherry-Picking’

Answer 14

= Where D wrongfully mixing C’s assets w/ his own: C can choose which transactions made out of the fund were made with his money and which transactions were made with D’s money

Authorities :
- Re Hallett’s Estate = T (presumably) dissipates his own money 1st, B can claim what’s left (as long as not within the ambit of Clayton’s Case)
- Re Otaway = B can pick which transactions out of the mixed fund to trace into

Question 15

[T] Mixed substitutions - wrongdoers: the lowest intermediate balance rule

Answer 15

= C cannot appropriate subsequent contributions to the fund made by D or 3P

Authority = James Roscoe (Bolton) Ltd v Winder

Question 16

[T] - MS - W - Eg 1: T mixes £10 of her own money w/ £10 of trust money, then uses £10 to buy a painting and dissipates the remaining £10

Answer 16

= Re Hallett’s Estate : first in first out’ rule doesn’t apply here, T is deemed to have done the right thing and spent her own money

Question 17

[T] - MS - W - Eg 2: T mixes £10 of her own money with £10 of trust money, then uses £10 to buy a painting, and dissipates the remaining £10

Answer 17

= Re Otaway : Equity allows B to say T used B’s money to buy the painting

Question 18

[T] - MS - W - Eg 3: T mixes £10 of her own money with £10 of trust money, uses £10 to buy a painting which triples in value, £10 remains in the bank acc

Answer 18

Rimer J in Shalson v Russo: B can claim the profit, Re Otaway applies

Normally, presumption that T uses (dissipates) his own money 1st = Re Hallett

BUT if T used money of the mixed fund to make a valuable investment, B is entitled to claim that = Rimer J’s reading of Re Oatway

-> “if the beneficiary is not entitled to do this, the wrongdoing trustee may be left with all the cherries and the victim with nothing.”

Question 19

[T] - MS - W : opposing Rimer J’s reading of Re Oatway

Answer 19

= Pattern J in Turner v Jacob: Re Otaway interpreted as standing for the proposition that “where the trustee maintains in the account an amount equal to the remaining trust fund, the beneficiary’s right to trace is limited to that fund”

Question 20

[T] - MS - ICC - First in first out (authority)

Answer 20

= Clayton’s case : first payments into an acc are attributed to the 1st payments out of it

/!\ applies only to bank accounts and not where B’s money mixed w/ W’s = Re Hallett

Question 21

[T] - MS - ICC - First in first out (criticism)

Answer 21

• Criticised + scope limited in Re Hallett’s Estate (doesn’t apply where mixed w/ W’s money)
• Pb w/ rule = its arbitrariness : what ≠ Cs get depends on what D chose to spend his money on in which order
• CA in Barlow Clowes international ltd v Vaughan: bound by authority BUT suggested that would not apply the rule where application would be impractical, unjust or expensive, nor where the intention of the contributors were known

Question 22

[T] - MS - ICC - pro-rata

Answer 22

= Re Diplock

• Clayton should not be extended beyond context of bank accounts
• gains and loss should be shared btw contributors in proportion to their contribution to the fund

Question 23

[T] - MS - ICC - rolling charge

Answer 23

= Barlow Clowes

• takes into account chronology (as in timing) of contributions to and dispositions out of the fund
• Cs share losses and gains in proportion to the interest in the fund immediately prior to each withdrawal

Question 24

[T] - MS - ICC : A’s eg to clarify ≠btw 3 rules

A misappropriates £100 from B1 on Monday and £100 from B2 on Tuesday, puts money into same bank acc. A withdraws £100 form the acc on Wednesday, and uses it to buy a silver cup worth £1000. On Thursday, A takes a further £100 from B2 and credits it to the mixed acc (so B2 has now contributed 2/3 of it)

Answer 24

• Clayton : silver cup is all B1’s
• Pro-rata (Wednesday) : B1 and B2 each get half of the cup and half of the remaining £100
• Pro-rata (Thursday) : B gets 2/3 cup and 2/3 remaining money (even though contribºto cup was only 1/2)
• Rolling charge : B gets 1/2 cup and 2/3 money in acc